No savings today, an army of poor pensioners in 10 years

It is the complacency that I can't abide. Hardly anyone saves anymore. The spirit of the age is to spend everything that is earned; if that is not enough, then borrow, and above all, let the future take care of itself.

Where did this complacency originate? For some, there is a belief that accumulated home equity will suffice. When old age finally comes knocking, living standards will be protected by a quick downsize from the three bedroom semi to a two bedroom apartment. Others suffer from a more deluded idea; the state pension will be enough.

We will deal with the state pension in later posts. Suffice to say, we will dispose of any optimism about the value of pension in 10 years time.

Today, we will look at savings. Last week, the ONS published the savings rate for the first quarter of 2008. Only one percent of income generated in the first three months of this year ended up as savings. We spent the rest.

The first chart below illustrates total income by five income groups; starting with the lowest 20 percent and rising to the highest 20 percent of earners. It breaks income down into three categories; earned income (i.e. wages), benefits, and investment income. The data covers all households, including those who have already retired.

Investment income (the purple area in the chart) is the key number. As you can see, it only makes up a small component of total income. For the wealthier households it is a little higher, for the lower income groups it is lower. This investment income covers private pensions as well as regular investment income on shares, bonds and bank accounts.

For each of the five quintiles, the chart presents only averages. In each group, retirees will not typically receive any earnings. Instead, their income will derive from benefits as well as investment income.

The key point is that investment income is surprisingly low across all income categories. Moreover, the average disguises huge variations. A few people have a lot of savings; most have very little.

At this stage, you might ask "how do you know that most people save very little while others have a lot?"

Here we come to the shocker. According to the most recent family resources survey, 79 percent of households have savings less than ₤10,000, 56 percent of households have less that ₤1,500, and around a third have absolutely no savings at all. This sorry tale is illustrated in the chart below.

To put these numbers in context; average household income is about ₤30,000 a year. This means that 80 percent of the population have less than 4 months of average income saved up, while half the population have less than two weeks.

When people do get around to saving, why do they save? When asked, about 40 percent of people say they save for emergencies; while a slightly lower number say they are saving for some housing related reason. About 36 percent are saving for consumption related reasons; a holiday or a "special" occasion. Only 30 percent say they are saving for retirement.

Within about 10 years, 20 percent of the UK population will be over 65. The vast majority of these future retirees are depending on two things; a house sale and a generous state pension. Neither of these two things are likely to materialize.

The UK economy is facing many problems right now, but perhaps the biggest one is a massive explosion in old-age poverty. Within 10 years, the UK will be overflowing with grey haired penniless retirees, who have put nothing away for their old age.

Finally, everyone who reads this post should ask themselves a couple of simple questions; how much have I saved? How much do I expect to have by the time I retire? Have I diversified my investments? Am I depending on the sale of my house to carry me through retirement? If the answers to these questions are nothing, very little, no and yes, then you are in big trouble, and don't say you weren't warned.